Money and credit

1. How does money solve the problem of double coincidence of wants? Explain
with an example of your own.

Answer

-In a barter system where goods are directly exchanged without the use of
money, double coincidence of wants is an essential feature.
-By serving as a medium of exchanges, money removes the need for double
coincidence of wants and the difficulties associated with the barter system.
-For example, it is no longer necessary for the farmer to look for a book
publisher who will buy his cereals at the same time sell him books.
All he has to do is find a buyer for his cereals. If he has exchanged his cereals
for money, he can purchase any goods or service which he needs. This is
because money acts as a medium of exchange.

2. How do banks mediate between those who have surplus money and those who
need money?
Answer
-Banks keep small portion deposits as cash (15%) for themselves (to pay the
depositors on demand).
-They use the major portion of the deposits to extend loans to those who need
money. In this way banks mediate between those who have surplus money and
those who need money.

3. Look at a 10 rupee note. What is written on top? Can you explain this
statement?
Answer
“Reserve Bank of India” and “Guaranteed by the Government” are written on
top.
In India, Reserve Bank of India issues currency notes on behalf of the central
government. The statement means that the currency is authorized or
guaranteed by the Central Government. That is, Indian law legalizes the use of
rupee as a medium of payment that can not be refused in setting transaction in
India.
4. Why do we need to expand formal sources of credit in India?
Answer
We need to expand formal sources of credit in India due to:→ To reduce
dependence on informal sources of credit because the latter charge high
interest rates and do not benefit the borrower much.
→ Cheap and affordable credit is essential for country’s development.
→ Banks and co-operatives should increase their lending particularly in rural
areas.
5. What is the basic idea behind the SHGs for the poor? Explain in your own
words.
Answer
 The basic behind the SHGs is to provide a financial resource for the poor
through organizing the rural poor especially women, into small Self Help
Groups. They also provide timely loans at a responsible interest rate without
collateral.
Thus, the main objectives of the SHGs are:
→ To organize rural poor especially women into small Self Help Groups.
→ To collect savings of their members.
→ To provide loans without collateral.
→ To provide timely loans for a variety of purposes.
→ To provide loans at responsible rate of interest and easy terms.
→ Provide platform to discuss and act on a variety of social issues such
education, health, nutrition, domestic violence etc.

6. What are the reasons why the banks might not be willing to lend to certain
borrowers?
Answer
The banks might not be willing to lend certain borrowers due to the following
reasons:
→ Banks require proper documents and collateral as security against loans.
Some persons fail to meet these requirements.
→ The borrowers who have not repaid previous loans, the banks might not be
willing to lend them further.
→ The banks might not be willing to lend those entrepreneurs who are going to
invest in the business with high risks.
→ One of the principle objectives of a bank is to earn more profits after meeting
a number of expenses. For this purpose it has to adopt judicious loan and
investment policies which ensure fair and stable return on the funds.
7. In what ways does the Reserve Bank of India supervise the functions of Banks?
Why is this necessary?
Answer
The Reserve Bank of India supervises the functions of banks in a number of ways:
→ The commercial banks are required to hold part of their cash reserves with their
RBI. RBI ensures that the banks maintain a minimum cash balance out of the
deposits they receive.
RBI observes that the banks give loans not just to profit making businesses and
traders but also to small cultivators, small scale industries, small borrowers etc.
→ The commercial banks have to submit information to the RBI on how much they
are lending, to whom, at what interest rate etc.
This is necessary to ensure equality in the economy of the country and protect
especially small depositors, farmers, small scale industries, small borrowers etc. In
this process RBI also acts as the lender of the last resort to the banks.
8. Analyse the role of credit for development.
Answer
-Cheap and affordable credit plays a crucial role for the
-country’s development. There is a huge demand for loans for various economic
activities. -The credit helps people to meet the ongoing expenses of production
 and thereby develop their business. Many people could then borrow for a
variety of different needs.
-They could grow crops, do business, set up industries etc. In this way credit
plays a vital role in the development of a country.
9. Manav needs a loan to set up a small business. On what basis will Manav
decide whether to borrow from the bank or the moneylender? Discuss.
Answer
Manav will decide whether to borrow from the bank or the money lender on the
basis of the following terms of credit:
→ Rate of interest
→ Requirements availability of collateral and documentation required by
banker.
→ Mode of repayment.
Depending on these factors and of course, easier terms of repayment, Manav
has to decide whether he has to borrow from the bank or the moneylender.